India: Shifting consumption patterns to see increased PE interest in online retail, cloud kitchens

India. Photo by Elle on Unsplash

The covid-19 pandemic will sway investor preference towards online retail, cloud kitchens, essential consumer goods, such as packaged foods and staples, and health and hygiene products, as heightened consumer appetite for such goods and services will drive investments in these segments, analysts at Crisil Research said in a note on Wednesday.

As companies grapple with supply and production constraints, an extended lockdown and evolved consumer behaviour, Crisil expects it to shave off 2-4% revenue growth for consumer essentials, while discretionary manufacturing and consumer services could take a revenue hit of 16-30% in 2020-21.

Moreover, a slump in affordability and uncertainty on when businesses will return to normalcy could see discretionary categories such as apparel, electrical appliances, and fast food chains take longer to recover. Discretionary spending among Indian households could take a year to revive, it said.

Crisil based its estimates on future consumer demand in India, keeping the base-case scenario of the lockdown ending in the first quarter of this year. “In case of extended vulnerability because of fresh extension of lockdown into the second quarter, the fall could be 30-40% steeper,” it said.

All this will beat down valuations, delaying exits for private equity (PE) players, the note said. “However, the slump will throw up new bargains among consumer businesses with good long-term prospects, creating fresh investment opportunities for PE players,” Crisil said.

Analysts at Crisil Research also expected the health and wellness segment to emerge as the key investible theme for PE investors. “Consumer behaviour will change in the near term as availability, convenience, affordability, hygiene and safety become priorities. The shift in brand loyalty because of unavailability will boost sales of local and small and medium-sized enterprises and manufacturers with a flexible logistics network,” said Rahul Prithiani, director at Crisil Research.

Analysts expect a fall in revenue for essentials such as packaged food, packaged household products, and staples “as demand is only marginally impacted”. However, e-retail and essential items will fare much better, with lower fall in revenue, as the lingering fear of contracting coronavirus will boost e-tailers and cloud kitchens, said Prithiani.

“These will also bounce back faster, in a month, as consumers switch to available local brands, and as e-retail platforms meet the need for contactless shopping and doorstep delivery,” said Crisil.

Household appliances, readymade garments and quick service restaurants will witness the sharpest decline in revenue, as consumers postpone discretionary purchases, and rework their household expenses to prioritize convenience, affordability, hygiene and safety. “Stretched working capital cycles will put a squeeze on liquidity and hurt profitability,” the note said.

Cloud kitchens will also attract PE interest as they revive faster than traditional dine-in restaurants and have lower expenses. “Cloud kitchens is one segment that will attract PE interest as they will revive faster than traditional dine-in restaurants and have lower rental expenses,” analysts at Crisil Research said.

The article was first published on livemint.com

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.